Game Over for Phil Falcone’s Lightsquared

Phil Falcone, CEO of Harbinger Capital, made one of the biggest investment mistakes (ever?) by not only putting all his eggs in one basket, but in an investment which was subject to heavy Government scrutiny. The investment also involved a possible scandal, which would have effected national security.

GOP staffers of the House strategic forces subcommittee accused the White House of trying to influence the testimony of an Air Force general who was speaking about the project’s potential to interfere with the Global Positioning System, the satellite network relied on by the military and private industry. The staffers said Gen. William Shelton revealed in an earlier closed meeting that the White House pressured him to include language in his testimony Thursday supporting LightSquared’s venture.

If this was true it could even be an impeachable offense.

Either way, the project looks to be dead now.

Investors can learn many lessons. Never invest in one company only, a "black swan" event could occur. In this case you did not need a Black Swan event, since the investment itself was highly risky. The investment consisted of poring money into an illiquid asset, which had no cash flow. The only possible way to make a profit was to convince the regulators that it would not interfere with GPS frequencies.

Looking at how bad this is, might make Bruce Berkowitz feel a bit better about 2011.

LightSquared and other telecommunications investments account for about 90 percent of net assets in the Capital Partners fund and more than 50 percent of the Special Situations Fund, which together hold about $5.5 billion, according to investors.

And more:

Building a network will cost about $5 billion, says Credit Suisse Group AG telecom analyst Jonathan Chaplin. Falcone will have to cover another $3 billion in losses while he hustles for customers, Chaplin says. “It’s going to take a lot of capital to get it built, and I’m not sure the capital is available,” he says.

And finally:

The licenses are probably worth $9 billion today, according to Chaplin. They cost Falcone about $4 billion, including leases on wireless frequencies he signed to complement SkyTerra’s, Chaplin says. Any transaction would need approval from the FCC.

Investors will have to wait longer, perhaps for an initial public offering, if Falcone keeps building. McCaw’s Kirkland, Washington-based Clearwire, which sold shares to the public in April 2007, has a market value of $7.3 billion.

9 Government agencies released the following statement yesterday on Lightsquared:

"Substantial federal resources have been expended and diverted from other programmes in testing analysing LightSquared's proposal," the letter noted.

LightSquared's initial roll out plans, featuring two operational bands, one closer to the GPS operational frequency and one farther away, was shown to have a drastic impact on GPS operations for aviation and other safety-critical functions earlier this year. An amended plan by LightSquared, offering to operate in the lower frequency band only, had been tested by the US Air Force and analysed by the US Federal Aviation Administration (FAA) over past three months.

"It is the unanimous conclusion of the test findings by the National Space-Based PNT EXCOM agencies that both LightSquared's original and modified plans for its proposed mobile network would cause harmful interference to GPS receivers," said Carter and Porcari. "Additionally, an analysis by the FAA has concluded that the LightSquared proposals are not compatible with several GPS-dependent aircraft safety-of-flight systems."

The group said that while it supports the Obama administration's 28 June 2010 request to make available a total of 500MHz of spectrum available over the next 10 years for broadband, that GPS must be protected.

"We propose to draft new GPS spectrum interference standards that will help inform future proposals for non-space, commercial uses in the bands adjacent to the GPS signals and ensure that any such proposals are implemented without affecting existing and evolving uses of space-based PNT services vital to economic, public safety, scientific and national security needs," said the EXCOM.

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flyboy44

Sorry Jacob, but since George Soros is a major player in Falcone’s investment here, you’re all wrong. It was just announced today as part of the social security tax deal that “selling” some FCC frequency spectrum might be a good idea to raise some capital for the US Gov’t, this is only a smokescreen to take care of good ol George. I see Falcone, George and Sprint doing very well…..